When an executor is appointed to an estate, he or she must exercise due care to ensure that he or she is fully aware of the priority of payments that must be made from the decedent’s estate. One potentially major pitfall for an executor is avoiding or being wholly unaware of a decedent’s state and federal tax liabilities.
If an executor fails to satisfy the decedent’s tax obligations and instead begins payouts to certain beneficiaries and creditors, this may be considered a breach of fiduciary duty and can lead to the executor being held personally liable for the tax liabilities which have not been satisfied by the estate. It is incredibly important to be cognizant of unrecorded estate tax liens which attach to the estate after death. Under Internal Revenue Code § 6324, certain individuals with either a fiduciary duty to the estate or being beneficiaries of the estate may find themselves personally liable for unpaid estate tax. For example, in U.S. v. Johnson, 112 A.F.T.R. 2d 2013-5474 (D.C. UT), the court found that trustees of a trust were personally liable for unpaid estate tax whereas the beneficiaries were not. The only recourse for the trustees was to file a cause of action against the beneficiaries.
To understand the full range of priority of payments, an executor should consult with a trust and estate attorney as well as with the estate’s accountant so as to fully comprehend the entirety of the estate’s assets and liabilities.
In an increasingly global world, executors must take exceeding precaution to ensure that the estate is not liable for any tax on foreign-held assets, or potentially worse, holds foreign assets that have not been previously reported. The potential penalties and tax involved with unreported assets can be exorbitant, therefore an executor should be sure to do his or her due diligence in determining the estate’s assets and especially the estate’s tax liabilities in order to avoid potentially being personally liable for the taxes due from the estate to the federal and state taxing authorities.
